With the UDAY burden off their shoulders, state governments in aggregate were to revert to well below 3% fiscal deficit threshold in FY18 — 2.7% to be precise — but the Reserve Bank of India (RBI), analysing the revised estimates (REs) of 29 states, put their combined deficit in the year at 3.1%. Shortfalls in own tax revenues — even as goods and services tax (GST) revenue was protected with 14% guaranteed growth under a compensation mechanism — and higher revenue expenditure owing mainly to pay revisions and farm loan waivers drove up the deficit. While the budget estimates (Bes) unveiled by the states for 2018-19 indicate a consolidated gross fiscal deficit of 2.6% of GDP, the RBI cautioned that “visible fiscal pressures are emerging for several states on the expenditure side” and pinned hopes on the stabilisation of the GST “that should boost states’ revenue capacity and support the resumption of fiscal consolidation”.While the RBI data relied on the REs for 2017-18, a perusal of the actual numbers for the year put out by the Comptroller and Auditor General would suggest that the fiscal slippage by the states was much lower. Post-REs, several states compressed spending to be fiscally responsible. According to the CAG data, 17 states (except the northeastern states, Jammu and Kashmir, Bihar, Jharkhand and Goa), reported their combined fiscal deficit at a benign 2.64% of their aggregate gross state domestic product in 2017-18. This was after a 14% squeeze in revenue expenditure and even a steeper 22% cut in capex from the BE levels.Of course, on a year-on-year basis, there was still a 4% increase in the spending by these states, whose tax revenue grew a somewhat strong 10%. “Going forward, fiscal risk may emanate for many states going for election during the year, continuing announcements and roll-outs of farm loan waivers as well as the implementation of the pay commission awards by some states. If the likely slippage is reflected in higher borrowing requirements for 2018-19, there could be a concomitant impact on borrowing costs,” the RBI said in its latest annual review of state budgets under the title “State Finances: A Study of Budgets”.At the RE level, the fiscal deficit for 2017-18 was the highest among major states for Assam (12.7%) — which is under special category — while Bihar (7.2%), Punjab (4.5%), Rajasthan (3.5%) Odisha (3.5%), Madhya Pradesh (3.4%), Andhra Pradesh (3.4%) and Kerala (3.4%) also reported the deficit to be much above the 3% norm. But the CAG data reviewed by FE showed that the deficits for many of these states in 2017-18 turned out to be much below the RE levels — for instance, Punjab’s deficit was just 2.3% as the state slashed capex by 59%; similarly, Tamil Nadu’s deficit was 2.58%, lower than RE of 2.8%, and Odisha’s 2.23% (3.5%).“While 12 out of 29 states had budgeted fiscal deficits above the 3% norm in 2017-18 (BE), the REs revealed that as many as 19 exceeded the norm. In fact the year 2017-18 saw a change from the previous few years with all deficit indicators worsening for Special Category states than that of non-special category states and most SC states recording GFDs above the 3% mark,” the RBI noted.The fiscal slippage by states, even though it could be lower than what RBI survey says going by later numbers, coincides with the Centre also doing a similar compromise under its obligation to pump-prime the economy: The Centre’s 2017-18 fiscal deficit came at 3.53% of GDP, marginally higher than RE of 3.5% and versus BE of 3.2%. While the Centre’s fiscal deficit, according to an earlier FRBM plan, was to come down to 3% in 2018-19, the new target for the current year is 3.3% and deficit level is to meet the 3% norm only in 2019-20. While there are concerns over the Centre’s ability to meet this year’s target, Union minister Arun Jaitley and interim finance minister Piyush Goyal have both asserted recently that the fiscal goals would be achieved without fail.Outperforming the Centre, the state governments had achieved creditable fiscal consolidation for a few years till 2011-12 (when their combined deficit stood at 1.93% of GDP), but have since turned less prudent; the combined deficit widened to 2.6% in FY15 and the UDAY scheme for power discoms extended the fiscal gap to 3.1% in FY16 and further, to 3.5% in FY17. While the states’ combined revenue deficit was projected to be zero in 2017-18 (BE), REs show this deficit at 0.4%. The target for this year is a revenue surplus of 0.2%.